What is Bitcoin Mining And How Does it Work?
Bitcoin mining is a touchy subject and is usually one of the main points of contention among crypto bros and crypto haters. It especially grinds the gears of the latter because of its “adverse environmental impact.” Bitcoin is said to consume approximately 150 terawatt-hours of electricity each year, which is more than Argentina, a country that has a population of almost 46 million people.
NGL, that’s a lot of energy! Miners and crypto bros, however, will argue that innovative approaches offered by Bitcoin and other proof-of-work cryptocurrencies have the ability to make a green impact and become the new face of clean energy storage. But before we go deeper into this rabbit hole, let’s first try to answer some basic questions: what is Bitcoin “mining”?, how does it actually work?, why does it require so much energy?, and, most of all, should you do it?
What Is Bitcoin?
By market capitalization, Bitcoin, which was introduced in 2009, is the biggest cryptocurrency ever. Bitcoin is generated, distributed, exchanged, and stored using a blockchain, which is a decentralized, digital ledger system, in contrast to government-issued fiat money.
The history of Bitcoin as a store of value has been tumultuous; over the course of its relatively brief existence, it has experienced numerous booms and busts. As the first virtual currency to experience widespread acceptance and success, Bitcoin served as a model for a number of other cryptocurrencies, like Etherium and Tether.
What Is a Blockchain?
Blockchain technology illustrates the revolutionary magic of crypto. In traditional banks, we rely on big bankers to provide us with the most accurate balance information. We trust them to keep an accurate record of all our transactions even if we don’t have the slightest idea of what they do with our money behind the scenes.
Well, crypto removes that middleman in the equation. The key here is agreement and consensus as anyone with a computer and an internet access can engage, verify, and view a public blockchain.
The entirety of the crypto world lies within this chain. It is the network that powers Bitcoin and all other cryptocurrencies. Again, a blockchain is essentially a distributed ledger, a shared database that uses encryption to store and protect data. So, where does mining come in?
What Is Bitcoin Mining?
Bitcoin mining is a misnomer. Bitcoin “miners” don’t really excavate a mountain of data in search of gold to create a coin as the name might imply. In the most simplest terms, it is the process of report-keeping, verifying, or adding new transaction records to the blockchain, which serves as Bitcoin's public ledger.
To obtain rewards in the form of bitcoins, miners must solve complex mathematical puzzles or cryptography calculations. These puzzles are solved using mining rigs, and miners are paid in Bitcoins for each solution they discover. The quickest miner to discover a key receives one Bitcoin that is immediately added to their account, and the process continues until another miner discovers another solution and receives one coin as well. Because of this, miners who use specialized computing systems, composed of efficient hardware and cutting-edge software, have an advantage over other miners simply because they can operate rapidly and continuously around-the-clock.
When a transaction occurs on the chain, data from the preceding block is replicated to a new block. The record of this new encrypted data is then verified by miners in the network by adding blocks to a chain. The spoils of crypto mining is basically a reward system for users who keep accurate records of transactions within the network.
If you still can’t understand, imagine a game show, but instead of a handful of studio contestants, think of millions of participants worldwide all joining in. The mechanics of this game is simple (or maybe not): solve a math problem. The winner gets to add a block to a chain and also pick which transactions are contained within that block. But, most of all, people want to participate in this game because they are rewarded with Bitcoin every time they win.
The speed at which blocks are created increases with the number of players joining in a particular game. The solution can be solved more accurately by hundreds of people than by one person on their own. Additionally, the most well-liked or popular game will produce a longer chain than the others because blocks are created faster in this game.
Since thousands to millions are playing the same “game,” a consensus is being built. More than competing with each other, players–or miners–are collaborating to build a single version of a transaction list.
Should You Mine Bitcoin?
The risks associated with mining are frequently monetary, and sometimes legal. Mining is risky particularly because you might spend time and money buying mining equipment costing hundreds or thousands of dollars only to see no return on your investment. Additionally, if you live in a country where mining is not permitted, you should think twice before spending money on mining equipment.
Alternatively, if you still seek to engage in Bitcoin mining despite the risks, you can use the “pickaxe strategy” and invest in companies that create equipment and gear, such as ASICs or GPUs, ideal for small-scale Bitcoin mining. Nowadays, however, unless one has access to ultra cheap electricity, mining Bitcoin on one's own is rarely profitable. So, tread lightly!
Finally, if you’ve decided that mining isn’t for you, the easiest way to obtain Bitcoin, or any other cryptocurrency, is buying it through a crypto exchange.